How to Incorporate Human Capital into Healthcare M&A Strategies

Jennifer Perry, managing principal for FMG Leading, underscores the importance of culture and human capital during the M&A process.

HealthLeaders released an Intelligence Report in June 2020 titled, Healthcare M&A: Moving Forward in a Post-COVID-19 Landscape, which found that stakeholders “strongly believe that consolidations will continue to be a significant trend in the healthcare sector."

Despite concerns about the impact of the COVID-19 pandemic, hospitals and health systems continue to participate in successful M&A activity. Still, there have also been instances of soured relationships or unmet needs leading to failed M&A, lawsuits, executives leaving, or losing staff.

A prime example of this is the ongoing saga between Hoag Memorial Hospital and Providence St. Joseph.

In 2012, Hoag, an Orange County-based nonprofit regional healthcare delivery network, joined St. Joseph Health, a nonprofit health system based in Irvine, California. Then, in 2016, St. Joseph merged with Providence Health, a nonprofit health system based in Renton, Washington, to create Providence St. Joseph Health.

In May 2020, Hoag filed a lawsuit to split from Providence Health, due to the failed implementation of Hoag's initial vision in joining St. Joseph Health. The lawsuit is currently ongoing.

Related: 5 Questions With Sentara Healthcare CEO on Pending Merger With Cone Health

To better understand the role of human capital in healthcare M&A activity, HealthLeaders spoke with Jennifer Perry, managing principal for FMG Leading, who said that culture should be considered during negotiations in order to create a successful integration and detailed why it's an important part of the organizational strategy.

This transcript has been edited for clarity and brevity.

HealthLeaders: What M&A best practices should healthcare executives keep in mind when they are exploring a possible transaction?

Jennifer Perry: Some of the recent information I've seen out there is that there's been a big uptick in [in M&A activity].

One of the things that resonated with me from [the HealthLeaders M&A] survey is the fact that oftentimes, why mergers collapse is because there are certain aspects that [organizations] don't pay enough attention to early on in the process. That ends up coming back to cause issues and levels of misalignment.

[The issues] fall into three categories:

1. Culture. Ensuring that there's both an understanding, clarity, and alignment around not only the existing cultures of both organizations, but also around what that culture and identity is for that merged organization going forward [can lead to success.]
2. Stakeholder management throughout the process. Where I've seen these [mergers] go south is [when] [the merging organizations don't] engage [the organization's] stakeholders. Another that often is discounted, and is critical, are community stakeholders. You'd be amazed how important and energized a community can be when they see that a beloved hospital or organization is being acquired or taken over by another.
3. Clarity. Not only around expectations and assumptions, but what the integration plan [is], and planning that early on using and engaging stakeholders from both organizations. I have found that if you take advantage of that process early on, you're more likely to end up with a successful merger where people are engaged, as well as a clear roadmap for how that acquisition will move forward and carry out the expected benefits associated with it.
    

HL: Is there a best practice checklist that can accompany the legal steps and encompass those three areas during M&A activity?

Perry: Sometimes when these transactions happen, people get so focused on the due diligence of the finances, systems, and legal structures that they forget this is about bringing two organizations and sets of cultures together.

We use a framework to evaluate different aspects of human capital. We call it our "Human Capital Index," and it includes six drivers with a series of assessments and questions to understand.

At a high level, those categories are:

1. Leadership quality. What is your leadership structure [and] leadership philosophy as it relates to leading the organization? That includes the governance as well as management systems and structures in the organization, [including] capabilities.
2. Strategic alignment. What is the strategic intent of each organization and the combined organization? [The aim is] getting clear around what success looks like there.
3. Culture and identity. We'll often do a culture assessment or values assessment between both organizations to understand where there's alignment and real differences in culture. Oftentimes, when an acquirer comes into an organization, they don't spend enough time understanding the legacy culture. They move too quickly to superimpose their own process management and culture in the acquisition, and don't understand the impact that can have as opposed to honoring the existing identity and culture of the prior organization.
4. Engagement and retention. This is looking at your workforce and how you engage your workforce. How do you manage your workforce and what's involved in that? 
5. Agility. What is the ability of the organization in terms of innovation, the way in which they make decisions? How they manage through change and their presence overall, as well as how it relates to how they engage workforce and carry on initiatives.
6. Execution. [How the] organization carries out its strategic plan and strategic priorities.

Within each of those six categories, we have several questions and performance indicators that we have identified out of best practices to help assess as part of the due diligence.

HL: Why is focusing on human capital during M&A processes important?

Perry: Even from your own study, when we looked at what were the things that caused mergers to fail, the largest one was culture. You can put in place all sorts of financial and governance structures, but ultimately, if you don't have alignment from the organization and commitment around the plan going forward, resistance in the organization will get in the way of that.

I'm not saying that in mergers and acquisitions people don't pay attention to the human capital issues, but they often don't address them early on enough. If you [don't have] alignment upfront, [or know] the impact and how is it going to play out, [then] once people get into it they realize that they came in with different expectations. If you don't start those things earlier on among leadership together, that's where you [find] these challenges.

Related: COVID Effect: Less than 80 Hospital Mergers in 2020

HL: How do you think the pandemic is going to affect M&A activity moving forward, and what are you seeing currently?

Perry: COVID has provided the perfect storm for hospitals; increased costs due the extra requirements to deal with the pandemic, and at the same time, a significant drop in volume of some of their more profitable types of service lines and business. A lot of those profitable services offset some of those services that are less profitable. As a result, hospitals are faced with an incredible drop in volume, revenues, and margin.

That's partly driving M&A for financial stability. Some are what I've seen and anticipate are organizations looking to enhance their size and geographic diversity, because we've known the pandemic has hit different parts of the country at different times and will continue to. Having all your business concentrated in one geography provides a level of risk. I'm seeing some of that desire to be larger, both in terms of diversification but also in terms of size and network expansion, so that they can be more attractive to payers who are putting together networks.

Another driver that I'm seeing from the pandemic is an increase in leveraging telehealth and information technology capabilities, as well as a shift to more outpatient services. For those hospitals and health systems that haven't been as much in the outpatient services areas, you're seeing more partnerships and more acquisitions of outpatient types of services, whether it's ambulatory surgery centers or other kinds of healthcare services and practices.

HL: Do you have any other M&A insights regarding human capital that you'd like to share?

Perry: One of the interesting things that I'm seeing on the merger and acquisition side is that more founders, particularly in medical groups and smaller healthcare companies, have been entrepreneurial and more inclined to sell. Consolidators are out there picking up a lot more organizations and founders are seeing that benefit associated with demand versus supply.

The other thing on the human capital side I've always found fascinating is it's a heavy lift right now for healthcare leaders. It's a hard job, and when you look at the average age of a lot of the leaders running hospitals and health systems, many of them are close to retirement.

What I have always found interesting is that as leaders of larger health systems and organizations are closer to retirement, ego becomes less of a factor. All of a sudden, they're starting to look at acquisitions and leadership, and not worried as much about, 'Will I be the leader of this next organization?' but more looking at the legacy of that organization. I anticipate that you're going to see some leaders looking to sunset their career and that does influence mergers and acquisitions.

Editor's note: This article was updated on January 28.

Related: Report: Healthcare Leaders Should 'Consider M&A a Key Part of Their Strategy'